Fortress looking to buy, may focus on distressed mortgages
By Alistair Barr, MarketWatch
Last update: 4:37 p.m. EDT March 25, 2008
SAN FRANCISCO (MarketWatch) -- Fortress Investment Group aims to raise $15 to $20 billion in new capital this year to help the hedge fund and private-equity firm pounce on opportunities created by the global credit crunch, Chief Executive Wes Edens said on Tuesday. Beaten-down mortgage-related securities may offer the most compelling investment opportunities, he added during a conference call with analysts. Financial-services companies may remain under pressure for a while, but that sector could also become very attractive in the second half of 2008, Edens explained. Fortress reported a fourth-quarter net loss of $29 million, or 43 cents a share earlier on Tuesday. Pre-tax distributable earnings, which exclude unrealized gains or losses on illiquid investments and certain types of expenses, but include so-called contingent revenue, fell 43% to $78 million, or 18 cents per dividend paying share. Analysts surveyed by Thomson Financial forecast earnings of 17 cents a share, on average.
Fortress also said it paid a dividend of 0.225 cent per share in the fourth quarter and will keep the same payout for the first quarter of 2008. Analysts took that as a positive sign.
"Weaker earnings were likely baked into the stock, which is off roughly 30% year-to-date," Marc Irizarry, an analyst at Goldman Sachs, wrote in a note to clients. Maintaining the dividend "ought to serve as proof of Fortress' confidence in its ability to persevere (or even thrive) amid difficult market conditions."
Fortress shares rose 3.5% to $11.40 during late afternoon trading on Tuesday. The stock is still down 38% from its IPO price of $18.50 in February 2007. The mortgage-fueled global credit crunch has increased concerns about Fortress. The firm's private-equity business relies partly on borrowed money to pay for acquisitions and that financing has either shriveled or become more expense since the leveraged buyout boom ended in the middle of 2007. A falling stock market this year also makes exiting private-equity investments through initial public offerings more difficult.
The credit crunch has also hit some hedge funds hard because the big brokerage firms that lend money and securities to these types of traders have pulled back, forcing some to sell assets to meet obligations.
But Edens said on Tuesday that Fortress' hedge fund business has avoided major problems, partly because the firm's funds don't use much leverage, or borrowed money. Fortress' credit hedge fund business, run by former Goldman executive Peter Briger "has weathered the 100-year storm in credit in fine shape," Edens explained. "One of the key aspects is not to be over-leveraged. Something that's a good idea in any market but in a market such as this one being on the wrong side can truly be fatal," he added. "We feel very good about the capital structure that Pete has and expect this to be a terrific investment year."
The firm's hybrid hedge funds, overseen by Briger, returned 1.94%, before fees, during the fourth quarter and were up 14.43% for 2007. That includes the Drawbridge Special Opportunities Funds. Fortress' liquid hedge funds, overseen by Michael Novogratz, returned 5.47%, before fees, during the fourth quarter and were up more than 18% during the whole of 2007, the firm reported. That includes the Drawbridge Global Macro funds.
Edens described the current credit crisis as "one of the great de-leveraging events of our lifetime," in which far too many assets are for sale with not enough financially strong buyers around to snap them up. See story on the 'Great Unwind.'
Investment banks used to act as a "buffer" in such situations, but these firms are having their own problems with strained balance sheets and more difficult access to financing, so, in some cases, they're making the problems worse, he explained.
However, de-leveraging has left some assets trading at very cheap prices, relative to the outlook for actual credit losses, Edens said. "Now is the time to look to buy," he said. "The gap between the market's perception and the actual risk is the widest I've ever seen." Fortress has raised $2.7 billion in capital so far in 2008 and hopes to raise $15 billion to $20 billion by the end of the year to capitalize on such opportunities. The best opportunities are in the mortgage market, Edens said. "Those are the areas that have been hit the hardest and the areas that actually have the most incremental upside," he added. "There's a fair bit to go, but the prices have gotten to the point where they truly seem very disconnected between the actual risk that's implied and where they are actually being valued." There is a lot of capital that's being raised to invest in these types of securities, but there will be a much bigger supply of beaten-down securities to invest in, Edens explained.
It may be a little too early to invest in financial-services companies, but very interesting opportunities may appear during the second half of 2008, he added. Banks and savings and loan institutions haven't raised much capital yet, probably because investors can't yet see how much these businesses will be hit by credit losses. But when the outlook clears and re-capitalization begins, "it will be a truly tremendous series of private-equity and other related opportunities," Edens predicted. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.
AI
